Their share prices are likely to continue to be supported by generous dividends. One of the reasons investors are willing to wade back into the banks is because of trade. All three banks have a trade finance business and have received awards for trade and supply chain financing.
On May 7, group CEO Wee Ee Cheong of United Overseas Bank(UOB) said that 10% of UOB’s balance sheet comprised “trade”.
Says Wee: “Trade constitutes about 10% of the total balance sheet. Most of our trade is intra-regional and China+1. 80% of our trade financing is domestic business and intra-regional, reflecting strong intra-regional activities.”
As far back as 2011, before China +1 became important during Trump’s first term, UOB had formed its Foreign Direct Investment (FDI) Advisory office to facilitate trade and investment into Asean.
See also: OCBC Hong Kong & Macau revenue grew 14% y-o-y in 1Q2025 supported by wealth
Hence, despite the disappointing 1Q2025 net profit announced on May 7, UOB’s share price fell by just 49 cents before recovering. Although unchanged y-o-y, net profit fell by 2% q-o-q to $1.49 billion, missing the market’s $1.54 billion estimate for the quarter. General provisions were higher y-o-y and q-o-q at $133 million, taking general provision reserves to $2.83 billion.
Mainly fees
Trade financing is a low-capital-intensive, fee-based business for banks. Banks charge fees for various trade finance services, such as issuing letters of credit, providing financing for imports and exports, and arranging other trade-related transactions.
See also: OCBC’s capital-light fee income growth is good for shareholders
Wee has referred to trade finance as a sticky business. “We see pockets of opportunities across our diversified portfolio. Trade flows in China, Asean and intra-Asean corridors are about US$1.5 trillion [$1.95 trillion] and growing, a trend that we expect to continue. We are well-positioned to capture the flows from this structural shift. In fact, most of our trade finance lending continues to be done within the region, reflecting strong intra-regional activities,” he says.
Trade financing products benefit banks by expanding their customer base, offering new revenue streams and increasing the overall value of their services. These products help banks build stronger relationships with clients, especially international businesses, and gain a deeper understanding of their operations. Furthermore, trade finance allows banks to offer a wider range of services and increases client loyalty.
Liberation Day on April 2 put a spanner in the works of trade finance by shifting the global order. Although the US has rolled back the tariffs and changed its mind several times, the rest of the world could continue trading with itself.
Since the growth outlook of local banks is tied to the economic growth outlook in the region, the so-called “US-China deal” removes some negatives. An expected US recession from a supply shock and a sharp slowdown in China’s GDP growth may even be on the back burner.
Bank of Singapore still expects stagflation this year, though. “If the new 10% baseline tariffs remain on all US imports — as this month’s UK and China deals suggest — and additional 20% tariffs remain on China to deter fentanyl supplies, then US consumers will face a tax hike of over US$400 billion or 1.5% of GDP. At the same time, higher tariffs may lift US core inflation to 3%–4%,” Bank of Singapore says.
Stress tests
Trade finance isn’t the end-all and be-all for the local banks. Net interest income (NII) continues to make up the largest portion of earnings. Nonetheless, the focus on fee-based income helps to boost earnings at a time when investors are concerned about credit costs. Still, wealth management fees depend on market conditions. The ability to sell products can be volatile compared to the annuity-type income from loans.
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According to some market observers, the local banks are probably shielded from the worst of the trade war on a “first-order” basis. Their direct exposure through their customers is limited. Helen Wong, group CEO of Oversea-Chinese Banking Corp (OCBC), says only 3% of its loan book is exposed to first-order trade with the US.
At DBS Group Holdings, group CEO Tan Su Shan says: “We have stress tested for multiple scenarios. Based on our assessment of first-order impacts, we are not severely affected. The good news is that our direct exposure to China-US trade flows, particularly to the US, is limited.”
Wee says: “We did go through a portfolio analysis and looked at some of the customers that export to the US. I would say, generally, it’s not really a major concern for us. The second-order impact will be more severe if the uncertainty continues; this could impact consumer confidence and the slowdown in the economy will materialise.”
Tan of DBS says the bank is stress-testing for stagflation and recession. “Some industries are more affected than others. For example, discretionary consumer goods, the auto sector and electronics. We are also watching for announcements related to semiconductors, healthcare and pharmaceuticals,” she adds.
Net interest income, margins
Bank of Singapore reckons the US Federal Reserve will stay cautious despite weaker growth and leave its fed funds rate at 4.25%–4.50% for most of 2025. “We still forecast only one Fed rate cut of 25 basis points [bps] this year,” says the Bank of Singapore report dated May 13.
Higher interest rates are good for banks’ NII and net interest margins (NIM). Nonetheless, with the excess liquidity sloshing around in Singapore, Sora has fallen, causing the 1QFY2025 NIM of banks to contract q-o-q and y-o-y.
In 1QFY2025, DBS’s commercial book NII declined 3% q-o-q but rose 2% y-o-y to $3.72 billion while its NIM fell 1% q-o-q and 2% y-o-y to 2.12%.
OCBC’s 1Q2025 NII fell by 4% q-o-q and y-o-y to $2.34 billion while NIM fell by 11 bps q-o-q and 23 bps y-o-y to 2.04%.
UOB’s NIM was unchanged q-o-q but down 2 bps y-o-y to 2% while NII fell 2% q-o-q but rose 2% y-o-y to $2.4 billion.
DBS and OCBC announced new highs in fee income from wealth management. “Fees were at a record, driven by higher sales of investment products and bancassurance, while treasury customer sales to wealth clients also reached a new high,” says group CFO Chng Sok Hui of DBS.
Similarly, group CFO Goh Chin Yee of OCBC pointed out that fees from wealth management reached a new high.
UOB, which is building up its wealth management segment, also recorded a 22% q-o-q increase and a 20% y-o-y fee income increase to $694 million from a combination of card fees, loan fees and wealth management fees.
Credit quality
Chng of DBS highlighted that its heightened general provisions (GP) of $205 million in 1QFY2025 were out of prudence and not because of deteriorating credit quality.
Chng explains: “Our GP totalling $4.2 billion consists of a baseline component and an overlay component. The baseline component factors in a credit cycle index based on sector and country are adjusted as macroeconomic variables (MEV) change. The overlay, which has grown by $200 million, now amounts to $2.6 billion. Since these are stress MEVs, we do not expect them to manifest soon. Based on economic projections so far, the $2.6 billion we have set aside should be sufficient unless conditions deteriorate significantly.”
Overlays are provisions set aside that exceed what MEV models indicate. CGS International says in a report that DBS’s total credit costs for 2025 should be on par with its guidance of 17 bps to 20 bps.
Goh says OCBC increased its GP to $118 million as a pre-emptive move. OCBC’s MEV model is updated every quarter, she adds.
Interestingly, although UOB’s GP rose to $133 billion as a pre-emptive move, group CFO Leong Yung Chee says the bank is “reviewing what needs to be changed” for its MEV model.
He says: “We have a broad expectation that growth and trade probably will be impacted, the extent of the impact, and which industries and countries will be hit.”
Michael Makdad, senior equity analyst at Morningstar, believes that UOB’s credit cost February guidance of 25 bps to 30 bps appears too optimistic. “Management plans to increase coverage of performing loans to 0.9% from 0.8% through higher general provisions, which we estimate would add 10 bps to credit costs if done over a year. We also expect trade-related disruptions to create cash flow challenges for some borrowers,” says Makdad in a report dated May 7.
What analysts say
JP Morgan is neutral on UOB. In a report dated May 7, JP Morgan noted that NIM held up well, with lower loan margins offset by higher interbank and securities margins. Another positive was the q-o-q and y-o-y growth in fee income from loan and trade-related fees. However, costs were higher than expected, with core expenses (ex-Citi integration in 2024) up 6% y-o-y. Including Citi, costs were down 1% y-o-y and q-o-q.
The major negative was the higher total credit costs of 35 bps. “We expect small downward revisions from the Street, with 1QFY2025 accounting for 24% of FY2025 estimates,” JP Morgan says.
Despite the contraction in NIM, Goldman Sachs sees OCBC’s results as a “decent set” with profitability holding up and intact asset quality. “We remain ‘buy’ on OCBC. Post results, we revise down our 2025 to 2027 net income estimates by 1.5%/2.2%/1.1% to $6,976 million/$7,055 million/$7,532 million, as we bake in the lower NIM in 1QFY2025 and higher credit cost, partly offset by higher non-NII and lower opex. Our 12-month two-stage discounted dividend model-based target price is unchanged at $18.30,” Goldman says.
For DBS, Goldman takes comfort in its capital management. “DBS sees itself as capable of sustaining a $0.24 dividend per share step-up in the next two to three years if ROE is maintained at 15%–17%. Additionally, they remain committed to returning $8 billion of excess capital as previously announced and note that further excess capital accumulated over the years will be returned after the completion of the committed current plans. Our 12-month target price is revised up to $50.20.”
OCBC and UOB are committed to paying out 50% of their net profit as ordinary dividends. OCBC has announced a $2.5 billion capital return to shareholders comprising dividends and share buybacks. UOB is returning $3 billion in surplus capital to shareholders through special dividends and share buybacks, including a 50-cent special dividend to be paid out this year.
